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On March 27, 2026, the Delaware Supreme Court affirmed the Court of Chancery’s decision in Witmer v. Armistice Cap., LLC, 344 A.3d 632 (Del. Ch. 2025) aff’d, No. 381, 2025, 2026 WL 849994 (Del. Mar. 27, 2026), dismissing a stockholder’s derivative action against Armistice Capital LLC and Armistice Master Fund Ltd. (together, Armistice). The complaint alleged, among other things, that Armistice, a significant but minority stockholder with board representation, breached fiduciary duties purportedly owed to the company under the strictures of Brophy v. Cities Serv. Co., 31 Del. Ch. 241, 243, 70 A.2d 5, 6 (1949). In Brophy, the court held that an issuer can recover damages against a fiduciary who abused that position by trading on inside information. The Delaware Supreme Court’s decision affirmed that a minority stakeholder does not take on fiduciary duties to a company that would support a Brophy claim solely by virtue of having board representation and allegedly obtaining insider information.
1 Background facts
Paul Witmer, a stockholder of Aytu Biopharma, Inc. (Aytu), brought a derivative action against: (i) Aytu’s directors; (ii) Armistice, Aytu’s largest investor; and (iii) related entities and inpiduals. Aytu is a publicly traded pharmaceutical company incorporated in Delaware, and Armistice is a hedge fund primarily focused on the health care and consumer sectors. As of April 2019, Armistice had a 41.1% stake in Aytu, and Armistice’s founder, chief investment officer and managing partner, Steven Boyd, sat on Aytu’s board from April 2019 to August 2021.
Armistice’s purchase transactions
In 2019 and 2020, Aytu engaged in several transactions with Armistice or companies in which Armistice held an interest. Armistice purchased directly from Aytu convertible preferred stock and warrants in transactions approved by Aytu’s board and stockholders. Further, Aytu acquired two other companies that Armistice partially owned. As a result of all these transactions, Armistice substantially increased its Aytu stock holdings.
Armistice’s stock sales
In March 2020, shortly after Aytu publicly announced a COVID‑19 testing agreement that caused its stock price to spike, Armistice sold tens of millions of Aytu shares. Consistent with Aytu’s internal insider trading policy, Armistice sought and obtained trading clearance from Aytu’s management. However, Aytu stock prices quickly dropped after these sales when the company announced it was also engaging in certain purportedly dilutive financings. According to plaintiff, Mr. Boyd allegedly knew about these planned financing activities at the time of Armistice’s sales.
2 Procedural history
Witmer sued derivatively in September 2022, asserting claims against Armistice, Boyd, and Aytu’s other directors for breach of fiduciary duty, aiding and abetting, insider trading, and unjust enrichment. In the Court of Chancery, Witmer alleged two principal theories of liability. First, based on Aytu’s 41% ownership in Aytu, he contended that Armistice was a controlling stockholder and breached its fiduciary duties in connection with Aytu’s purchases of the Armistice-related companies. Second, and most relevant here, Witmer alleged that Armistice improperly traded on material nonpublic information (MNPI) it had received from Boyd and that its profits were recoverable under Brophy.1
In March 2024, Witmer settled with Aytu’s directors. The settlement, approved in January 2025, dismissed the directors, including Boyd, and required Aytu to maintain a position of neutrality regarding the remaining claims against Armistice.
On Armistice’s subsequent motion to dismiss, the Court of Chancery first held that because Aytu had taken a position of neutrality on the claims against Armistice, demand was excused. Witmer, 344 A.3d at 646–8.
On the merits, Vice Chancellor Morgan Zurn granted Armistice’s motion to dismiss, holding that Armistice did not have the actual control necessary to be a controlling stockholder with fiduciary duties with respect to the acquisition transactions and did not owe any fiduciary duties under Brophy that restricted its right to sell its shares. On appeal, Witmer focused on the Brophy issue and did not pursue the control claim. In its March 2026 order, the Delaware Supreme Court affirmed that decision and adopted Zurn’s reasons for dismissing the case.
3 Witmer’s Brophy claim
Witmer’s principal argument on appeal was that Armistice owed fiduciary duties to Aytu sufficient to subject Armistice to a Brophy claim.
In Brophy, the Delaware Court of Chancery reviewed trading by Thomas Kennedy, who, although not a member of the board of nominal defendant Cities Services Company, was employed in an “executive capacity and as confidential secretary” to another defendant, who was a director of the company. In that capacity, plaintiff alleged that Kennedy “had access to confidential information concerning Cities Service Company and its operations and the operations of its subsidiaries[] and was therefore able to use that insider information to make a profit from trades of the company’s stock.” Brophy, 31 Del. Ch. at 243-4. Plaintiff therefore sought that Kennedy account, as constructive trustee, for all profits made by him from the purchase and sale of the stock.
The court relevantly held that “if an employee in the course of his employment acquires secret information relating to his employer’s business, he occupies a position of trust and confidence toward it, analogous in most respects to that of a fiduciary, and must govern his actions accordingly.” Id. at 244. Accordingly, Kennedy was liable to the company for profits made from the trades.
To prevail on a Brophy claim, a plaintiff must show that “1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004).
Witmer argued that:
- Brophy should be applied in this case on public policy grounds because “[t]he Brophy court grounded the duty to refrain from trading based on MNPI, and to account for the profits from any such trading, in long-standing principles of agency and trust law, recognizing that ‘[p]ublic policy will not permit [a party] occupying a position of trust and confidence . . . to abuse that relation to his own profit.’” Witmer v. Armistice Capital LLC, No. 381, 2025, BL-12, Appellant’s Opening Br. at 29 (citing Brophy, 31 Del. Ch. at 246-7) (Del. Supr. Oct. 28, 2025).
- The complaint sufficiently alleged that Armistice was given access to Aytu’s MNPI through Boyd and therefore established the requisite relationship of trust and confidence contemplated by the court in Brophy.
- The complaint also sufficiently alleged that Armistice’s trades in March and April 2020 were based on MNPI received through Boyd.
Witmer also argued that Brophy does not require Armistice to be a controlling stockholder, because Brophy fiduciary duties are independent of the duties owed by controlling stockholders and do not depend on allegations of control. Brophy duties, it maintained, are not a subset of general corporate fiduciary duties and can apply to any party that accesses MNPI where that access gives rise to a relationship analogous to that of a fiduciary.
4 The Supreme Court order and Court of Chancery decision
The Delaware Supreme Court affirmed the judgment of the Court of Chancery “on the basis of and for the reasons stated in its August 14, 2025 Memorandum Opinion.” See Witmer v. Armistice Cap., LLC, No. 381, 2025, 2026 WL 849994, at *1 (Del. Mar. 27, 2026).
In denying Witmer’s Brophy claim, the Court of Chancery rejected Witmer’s theory that Armistice owed fiduciary duties to Aytu because it possessed Aytu’s MNPI through Boyd as unsupported by Delaware law. Witmer, 344 A.3d at 655. The court held that none of the cases cited by Witmer supported imposing fiduciary duties “based on mere access to confidential information.” Id. at 656.
Instead, in Brophy, fiduciary duties arose from the “combination of [the trader’s] position within the company, which was a ‘position of trust and confidence,’ and access to confidential information acquired in the course of that employment.” Id. at 657. Here, the court held, “Armistice was not an Aytu employee. Armistice was not in a position of trust and confidence; . . . Armistice was not a controller. And while Mr. Boyd [was] an Aytu fiduciary, and learned confidential information during his directorship, neither [was] true for Armistice.” Id. Accordingly, it held that Brophy does not support the imposition of fiduciary duties on Armistice. Id.
The court also noted that if accepted, Witmer’s theory of liability would mean that “every stockholder with a director designee would itself be a fiduciary for purposes of a Brophy claim.” Id. at 658. The court declined to extend the applicability of fiduciary duties that broadly.
5 Observations
Brophy and fiduciary duty
For liability to attach for insider trading under the Delaware Brophy doctrine, there must exist a fiduciary relationship. The Witmer court, relying on precedent, described such a fiduciary relationship alternatively as a relationship in which a person controls something that it does not own; or a relationship in which a person places special trust in another person to protect its interests; or a relationship of domination and influence. These, according to the court, exclude a situation where a person is merely in possession of MNPI and is not otherwise in a fiduciary relationship with the corporation.
Under Rule 10b5-2 of the federal securities laws, a relationship of trust or confidence that may give rise to liability for insider trading exists where a person agrees to maintain information in confidence;1 or a person communicating information and the person to whom it is communicated have a history of sharing confidences; or, presumptively, a person receives information from a spouse, parent, child or sibling. None of these fits neatly within the contours of a fiduciary relationship drawn by the Witmer court. At the very least, whether Brophy picks up the types of relationships included under Rule 10b5-2 was not directly addressed in Witmer.
The Witmer court could have ascribed a fiduciary relationship to Armistice on yet another related basis. It is not unusual for an issuer to permit a director affiliated with a significant investor to convey company information to that investor. In turn, it is frequently understood that the investor will keep that information confidential in the same way the director would. Essentially, the affiliated investor steps into the shoes of its director and inherits its duties to the issuer.2 This paradigm might have been applied to support a Brophy claim against Armistice based on Boyd’s having been the conduit through which Armistice received its insider information. But it was not apparently directly advanced by the plaintiff in Witmer,3 perhaps because Armistice sought to comply with Aytu’s insider trading policy and precleared its trades with Aytu management.
Brophy vs. Rule 10b-5
There are both similarities and differences between Delaware’s Brophy doctrine and the liability it imposes for insider trading and insider trading liability under Rule 10b-5 of the federal securities laws.
The regimes are similar in that without some duty owed to the source of the MNPI — be it a fiduciary duty or a duty of trust and confidence — a trader will not incur liability for insider trading. There is no requirement under either Brophy or federal law, as there is in certain European jurisdictions, that there be parity of information available to sellers and buyers of securities.
But there are also important differences between Brophy and Rule 10b-5.
First, there may be differences in the types of relationships that may give rise to insider trading liability, as discussed above.
Second, under Brophy, liability exists to the issuer of the securities for appropriating information of the issuer for personal benefit. Under Rule 10b-5, the Securities and Exchange Commission may sue an insider trader for disgorgement and penalties. A trader’s private civil liability, however, runs to its transactional counterpart or to other contemporaneous traders in the market.
Third, because private civil liability runs to different parties under Brophy and Rule 10b-5, standing to bring suit also differs. A Brophy claim is a claim in the right of the corporation and may be brought by any of its stockholders, provided that either a demand to bring suit is first made on the board or, as was the case in Witmer, demand is excused. A private Rule 10b-5 claim must be brought by the trade counterparty or a contemporaneous market trader.
Fourth, Brophy requires that the trader utilize the MNPI as a basis for its trading activity.At least under the rules of the Securities and Exchange Commission, insider trading liability can attach where the trader possessed the insider information at the time of the trade, irrespective of whether the trader used the information in furtherance of the trade.
Fifth, under the federal securities laws, courts have articulated a jurisprudence of tipper and tippee liability, pursuant to which indirect recipients of inside information from a source they know was under a duty can also be held liable for trading on the information. Armistice received information from its director designee Boyd, yet was not held liable because the plaintiff was not able to show Armistice itself owed a fiduciary duty to Aytu.
Director bydeputization
A Brophy action has analogues to an action under p 16(b) of the Securities Exchange Act of 1934. That provision creates a statutory right of recovery on behalf of an issuer, or a stockholder if the issuer fails to pursue the claim, to recover profits realized by a director, officer or 10% beneficial owner from purchases and sales of stock within six months of each other. p 16(b) provides for strict liability. A p 16(b) claim does not depend on the defendant’s actual access to or use of insider information. Aytu stockholders, in fact, separately sued Armistice in federal court to recover short-swing profits pursuant to p 16(b). In the federal action, plaintiffs alleged that the later sales by Armistice of Aytu shares in the market could be matched against the shares that Armistice acquired in Aytu’s earlier transaction with companies in which Armistice held significant interests.
Rules 16b-3 under the Exchange Act exempts transactions from p 16(b) liability when an officer or director — but not a 10% stockholder — acquires securities directly from the issuer and the transaction was approved by the issuer’s board of directors or ratified by its stockholders. Certain of Armistice’s purchases from Aytu had, in fact, been approved by the Aytu board and/or Aytu’s stockholders. Armistice successfully argued in the p 16(b) action, in an issue ultimately tried to a jury, that it was a “director by deputization,” a concept recognized under p 16(b) case law, based on Boyd’s membership on the board. As such, Armistice benefited from the exemption of Rule 16b-3 available to board members.4
Thus, in the federal action, Armistice was deemed Boyd’s alter ego so as to benefit from the Rule 16b-3 exemption from short-swing profit recovery afforded to directors acquiring shares from the issuer. In contrast,, in Witmer, the court held that Armistice did not have fiduciary responsibilities of a director for purposes of insider trading under Brophy, notwithstanding Boyd’s service on the board.
6 Conclusion
Although regulation of insider trading is sometimes thought of as the exclusive province of the federal securities laws, state law can also be a source of liability for trading on MNPI. Delaware courts have developed the Brophy doctrine, allowing a corporation, or stockholders suing in the right of the corporation, to claim against fiduciaries who have used information of the corporation to profit through personal trading activity. The Witmer case, authoritatively affirmed by the Delaware Supreme Court, illustrates certain limitations of the Brophy doctrine but also raises questions as to the outer contours of Brophy liability. A stockholder that is not itself a controller of the corporation cannot be held liable merely because it received MNPI from its designee on the board. This and various other differences of application set Brophy liability apart from liability for insider trading under Rule 10b-5 of the federal securities laws. These laws may apply even in the absence of Brophy. Further,questions may remain as to the applicability of Brophy when a holder has agreed, expressly, or by custom and practice, to maintain information received from the corporation in confidence.
Footnotes
1. Witmer also argued that Armistice was unjustly enriched because it engaged in a “pump and dump” scheme whereby it obtained a short-term position in Aytu securities and used its influence over management and the board to orchestrate the company purchase transactions, and then dumped its shareholdings using MNPI to time its sales to maximize its profits. The Court of Chancery found that the claim was based on the same wrongdoing as Witmer’s breach of fiduciary duty claim and that both claims should be dismissed because “[t]here is no evidence in the record or argument submitted to the Court that th[e] unjust enrichment claim is materially broader than or different from the analogous breach of fiduciary duty claim.” Witmer, 344 A.3d at 662.
2. If a trader were to buy or sell shares notwithstanding an express agreement to maintain the issuer’s information in confidence, it might be subject to suit for breach of the contract under Delaware law. However, that would not necessarily be the same as a Brophy claim and might have different damages. In Witmer, Armistice in fact contended it abided by Aytu’s insider trading policy and consulted and got clearance from Aytu’s management before it sold shares, so this would not have been an issue.
3. See T. Laster and J. Zeberkiewicz, The Rights and Duties of Blockholder Directors, The Business Lawyer; Vol. 70, Winter 2014/2015, at 54-57.
4. See below under “Director by Designation” for additional discussion of possible liability by virtue of Boyd’s relationship with Armistice.
5. See Revive Investing LLC v. Armistice Cap. Master Fund, Ltd., No. 20-CV-02849-CMA-SKC, 2023 WL 5608350, at *8 (D. Colo. Aug. 30, 2023) (summary judgment decision discussing Armistice’s “director-by-deputization” argument); see also Witmer v. Armistice Capital LLC, No. 381, 2025, BL-12, Appellant’s Opening Br. at 18-19.
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